To profit from a decrease in the price of a security, a short seller can borrow the security and sell it, expecting that it will be cheaper to repurchase in the future. When the short seller decides that the time is right, or when the lender recalls the securities, the short seller buys equivalent securities and returns them to the lender. The process relies on the fact that the securities are fungible; the term “borrowing” is used in the sense of borrowing $10, where a different $10 note can be returned to the lender, rather than in the sense of borrowing a car, where the same car needs to be returned.
A short seller typically borrows through a broker, who is usually holding the securities for another investor who owns the securities; the broker itself seldom purchases the securities to lend to the short seller. The lender does not lose the right to sell the securities while they have been lent, as the broker will usually hold a large pool of such securities for a number of investors which, as such securities are fungible, can instead be transferred to any buyer. In most market conditions there is a ready supply of securities to be borrowed, held by pension funds, mutual funds and other investors.
The act of buying back the securities that were sold short is called “covering the short” or “covering the position”. A short position can be covered at any time before the securities are due to be returned. Once the position is covered, the short seller will not be affected by any subsequent rises or falls in the price of the securities, as the short seller already holds the securities required to repay the lender.
For example, if shares in XYZ Company currently trade at $10 per share, a short seller can borrow 100 shares of XYZ Company and immediately sell those shares for a total of $1,000. If the price of the shares falls to $8 per share, the short seller can buy 100 shares back for $800, return the shares to lender and keep the $200 profit, minus borrowing fees. The lender accepts the return of the same number of shares as it originally lent, despite the fact that the market value of the shares has decreased. However, if the price of the shares in XYZ Company instead rises to $25 per share following the short sale, and the short seller is required to return the shares, the short seller would have to buy back 100 shares at $2,500 and would make a loss of $1,500, plus borrowing fees.
Short selling is the opposite of “going long”. A short seller takes a negative, or “bearish” stance, believing that the price of a security will fall. Investors who employ short selling often use it to allow them to profit on trading in securities which they believe are overvalued, just as traditional long investors attempt to profit on securities which are undervalued by buying them.
Because a short position is the opposite of a long position, many features of the position are reversed in comparison. In particular, the profit, rather than the loss, is limited to the value of the security, but the loss, rather than the profit, is unlimited. In practice, as the price of a security rises the short seller will receive a margin call from the broker, demanding that the short seller either cover his short position, by purchasing the security, or provide additional cash in order to meet the margin requirement for the security, which effectively places a limit on the amount that can be lost.
It is generally advantageous for investors to know as much short sale information about a particular security. For example, a stock having a large short interest, the total number of shares sold short, outstanding may indicate that the stock will experience a negative return. In some cases, however, a large short-interest may be a “bullish” signal because it represents a latent demand for the stock that will eventually result in actual purchases of the stock by investors covering their short positions. Thus, an investor will be better equipped to make an investment decision with respect to a particular stock if the investor knows the short sale information about the stock.
Stock exchanges and/or government regulatory agencies may publish short sale information on a daily basis. The Hong Kong Stock Exchange publishes on a daily basis the number of shares shorted for a particular stock, the value of the total number of shorted shares and the percent of short sales relative to the total turnover for the particular stock. The Australian Stock Exchange publishes short-sale information in real-time for stocks traded on the exchange. A stock exchange or a government regulatory agency may publish short sale information through the release of dozens of text files that each includes millions of records about short sales.
However, such short sale information is still of limited value to short-selling investors. First, processing million of records on a daily basis may be beyond the capacity of many investors. Furthermore, this published short sale information does not easily help the investor identify either trends in the market or under-valued securities. Given the above, investors and traders are at a significant disadvantage due to the lack of analyzed short sale information. Accordingly, it is desirable to provide a system and method for aggregating, analyzing, and distributing short sale information.